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If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Bri-Chem (TSE:BRY) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Bri-Chem is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CA$3.0m ÷ (CA$66m - CA$37m) (Based on the trailing twelve months to March 2024).
So, Bri-Chem has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Trade Distributors industry average it falls behind.
See our latest analysis for Bri-Chem
Historical performance is a great place to start when researching a stock so above you can see the gauge for Bri-Chem's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Bri-Chem.
What Does the ROCE Trend For Bri-Chem Tell Us?
Things have been pretty stable at Bri-Chem, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Bri-Chem in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
On a side note, Bri-Chem's current liabilities are still rather high at 56% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Bri-Chem's ROCE
In summary, Bri-Chem isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 44% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.